Economies of
scope
Economies of scope are one of the main reasons
for such marketing strategies as product bundling, product lining, and
family branding. Often, as the number of products promoted is
increased and broader media used, more people can be reached with each
dollar spent. This is one example of economies of scope. These efficiencies
do not last, however, at some point, additional advertising expenditure
on new products will start to be less effective.
Economies of scope are conceptually similar to economies of scale. Whereas
economies of scale primarily refer to efficiencies associated with supply-side
changes, such as increasing or decreasing the scale of production, of
a single product type, economies of scope refer to efficiencies primarily
associated with demand-side changes, such as increasing or decreasing
the scope of marketing and distribution, of different types of products.
If a sales force is selling
several products they can often do so more efficiently than if they
are selling only one product. The cost of their travel time is distributed
over a greater revenue base, so cost efficiency improves. There can
also be synergies between products such that offering a complete range
of products gives the consumer a more desirable product offering than
a single product would. Economies of scope can also operate through
distribution efficiencies. It can be more efficient to ship a range
of products to any given location than to ship a single type of product
to that location.
Further economies of scope
occur when there are cost-savings arising from by-products in the production
process. An example would be the benefits of heating from energy production
having a positive effect on agricultural yields.
A company which sells many
product lines, sells the same product in many countries, or sells many
product lines in many countries will benefit from reduced risk levels
as a result of its economies of scope. If one of its product lines falls
out of fashion or one country has an economic slowdown, the company
will, most likely, be able to continue trading.
Not all economists agree
on the importance of economies of scope. Some argue that it only applies
to certain industries, and then only rarely.
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